Intro to Macroeconomics

IndicatorsEconomic Disasters

Supply-side Economics vs. Keynesianism

Vocabulary

Wednesday• GDP/GNP• Business Cycles

– Expansion– Peak– Recession– Trough

THURSDAY• Unemployment

– Frictional– Structural– Cyclical– Seasonal– Technological

Friday• Inflation/Deflation• Stagflation• Supply-side Economics• Keynesianism (John

Maynard Keynes) or Demand-side Economics

• Monday (Review)

Measuring Economic Performance• Gross Domestic Product (GDP): the dollar-value sum of all

completed goods and services produced in a country’s borders in one year. 2014 GDP = $16.77 Trillion. Foreign companies producing goods on US soil count as GDP.

• Gross National Product/Income (GNP/GNI): the dollar-value sum of all completed goods and services produced by a country in one year. 2014 GNP = $16.45 Trillion. U.S. goods produced in a foreign country count as GNP.

• These numbers are ESTIMATES using econometrics and statistics. Nobody physically counts the dollar-value of all goods and services produced. Totally impractical.

Business Cycle in words

• Peak: the economy has maxed out…it has stopped growing, but there is no decline yet.

• Recession: 6 straight months of decreasing GDP, resulting in higher unemployment.

• Trough: the worst of the recession. Things aren’t getting worse, but they aren’t getting better.

• Expansion: We’re immediately starting to grow. People are buying and GDP is going up.

JOKE

• What’s the difference between a recession and a depression?

• When your neighbor loses their job, it’s a recession. When you lose your job, that’s a depression!

Warm-up

• Go around the room and find someone who has your unemployment type: frictional, structural, cyclical, seasonal, or technological.

• Brief class discussion.

Unemployment

• Unemployment: being out of work and actively looking for work. 5 types:– Frictional– Structural– Cyclical– Seasonal– Technological

Frictional

• Being unemployed between jobs. Going from one job to another.

Restaurant Server Restaurant Manager

Structural The Economy no longer requires your labor. Mismatch between skills learned and skills demanded by

employers.

Auto jobs in DetroitNow in Mexico and Japan

The US has moved from a manufacturing economy to a services and computer economy…so manufacturing jobs have gone away. Fewer manufacturing jobs…so there is a mismatch between labor force skills now and the skills demanded by employers. People have manufacturing skills, but many do not have the technology service and computer skills demanded by employers.

Cyclical

• When the economy is in a recession and companies lose profit and have to lay people off.

• When people are out of work, they have no money to spend, other businesses can’t make money and more people are out of work and the cycle goes on.

SeasonalYou’re unemployed at certain times of the year.

• Snowplow driver• Fall and Winter is over…Now what?

Technologicalyour job can be done by a machine, which is more efficient and cheaper.

• Bank tellers• ATMs

Technological

• Truck Driver• Automated Truck

Other Stuff to Make You Think

• If politicians say unemployment is decreasing, is it really, or have people just stopped looking for work?

• Phantom workers: people who claim to be looking for work but are not. People do this to collect unemployment. The government paid out $520 billion in unemployment benefits from 2007-2012.

• Underemployment: people working at jobs that don’t match their skills:– Example: a recent college grad with a Master’s in Theatre

working as a waiter.

Ticket

• Answer Question 1 on part 4 of your packet regarding structural unemployment

• Let’s have a discussion

• List of popular, secure, and lucrative jobs that are in demand right now.

• Then, work on Part 2 of your packet.

Auction

• Rules:• Quietly raise paper with your bidding price on

it. Cross off and write new bid price if needed.• Regular auction would be too noisy and hard

to keep track of.• You can bid only what your max is.• Winner must subtract amount bid from new

account balance issued after each round.• We will have 3 rounds.

Inflation

• Inflation: A general increase in prices. When a country has an increasing GDP, that means the demand for goods is increasing and prices will go up (inflation).

• Deflation: The exact opposite of inflation. This doesn’t happen very often. Last time this happened was the Great Depression

Causes of Inflation

• Increased demand for goods (more willing and able)

• Federal Reserve orders the Mint to print more money (more money in circulation causes higher prices).

• It costs businesses more money to make goods (production problems or natural disasters).

Stagflation

• The combination of high inflation and low GDP/GNP.

• Usually accompanied by high unemployment. • Results in a leftward shift of the supply curve. • This is an economist’s worst nightmare (high

prices and high unemployment)• Example: 1970’s oil price spike.

1973 Oil Crisis

• OPEC (mainly Saudi Arabia) jacks up oil prices.• US support of Israel during the Yom Kippur

War: (Israel vs. Syria and Egypt)• By the end of the embargo in March 1974, the

price of oil had risen from $3 per barrel to nearly $12 per barrel

• Price ceilings came into effect…

Nominal vs. Real

• Nominal: not adjusted for inflation.• Real: Adjusted for inflation (price increases)

Nominal GDP growth – Inflation rate = Real GDP growth

3% - 2% = 1%

Nominal wage growth – Inflation Rate = Real wage growth

1% - 4% = -3%

Real Wages

Supply-side vs. Keynesianism

• Two competing macroeconomic philosophies on how to manage the economy’s ups and downs.

Supply-side Economics or Trickle-down Economics

Core Belief: Government needs to stay out of the economy.

View: De-regulate and cut business taxes. Focus on shifting the supply curve to the right by any means.

Proponents: Robert Mundell(advisor to Richard Nixon)

Examples of Deregulating

• Airlines were regulated by the Civil Aeronautics Board.

• Set fares and told airliners where they could fly.

• Airline Deregulation Act of 1978• Eliminated those constraints.• Employment increased, profits increased,

miles flown increased.

Keynesianism

• Founded by John Maynard Keynes (London School of Economics)

• Shift the demand curve left or right depending on the situation.

• Favors government intervention and spending to fix an economy.

• Used extensively during the 1930s.

Common Keynesian Policies

Policies• Stimulate Economy (unemployment too high)

– Cut consumer taxes– Increase government spending– Increase money supply

• Contract Economy (inflation too high)

– Raise consumer taxes– Decrease government spending– Decrease money supply

Graphs

Demand………….Supply

Here, inflation increases, Real GDP increases demand shifts right.

Here, inflation decreases, Real GDP decreases demand shifts left.

Here, inflation increases, Real GDP decreases supply shifts left.

Here, inflation decreases, Real GDP increases supply shifts right.

Let’s Solve Challenge Question 3a and 3b

Finish Part 3 and Part 4